The past week has seen some significant developments on the international retail scene.

All eyes have been trained on the Indian retail sector for some time now. Wal-Mart’s announcement last Monday (27 November) that it has entered into a tie-up with Bharti Enterprises, a group owned by Indian telecommunications entrepreneur Sunil Bharti Mittal, has increased the level of scrutiny that this sector is under. 

Currently, small independent stores dominate the Indian retail market, which is worth in excess of US$250bn a year. Organised retail makes up just 3% of the total retail sector, which in turn accounts for about 11% of GDP. Modern retailing is just starting to emerge and international retailers are lining up to invest in this quickly growing and underdeveloped market. However, until now they have been kept at bay by India’s rules limiting foreign direct investment (FDI).

Under India’s strict FDI regulations, foreign retailers are not permitted to directly own assets in the Indian retail market but can hold a limited stake in joint ventures with Indian companies. So, when Bharti revealed that it was planning to enter the supermarket sector in collaboration with a foreign partner, many of the big internationals signalled their interest and for a long while it looked as though the UK’s Tesco was the front runner. 

Having announced its decision to form a partnership with Wal-Mart, Bharti intends to open hundreds of Wal-Mart branded stores throughout India over the next five years under a franchise agreement.

Through this deal Wal-Mart gains market access, albeit of a limited nature. This does not mean that it is going to be plain sailing from here on in; the retail giant now faces the challenge of making the venture profitable. One huge, but not insurmountable, barrier to this is India’s convoluted, inefficient and costly supply chain arrangement that sees fresh produce spoil and retail prices pushed up to cover the costs of wholesalers and middlemen.

Another issue that Wal-Mart must address is its offering. It seems likely that the retailer will be eyeing India’s growing number of middle class urban consumers, who have already begun to turn away from traditional independent retailers. Nonetheless it is fair to observe that while Wal-Mart’s model works well in societies with homogeneous production and consumption systems India’s production, and consequently consumption, is highly fragmented. No small challenge then is the need to balance high retail volumes with small-scale and disparate production and consumption expectations.

The Wal-Mart JV could also face increasing competition in the market. Following Wal-Mart’s announcement, there has been a spate of reports from the country that Indian retailers, such as Reliance Retail, are stepping up their pace of expansion in response. Rumours emerged today, for example, that Reliance has purchased smaller rival Adani Retail. Meanwhile, Tesco told just-food this morning that the company is still eyeing the market.

“We’re researching the market and looking at various opportunities there,” the Tesco representative commented. “It’s an exciting market and we are watching it with interest,” he added.

Wal-Mart also reported some more downbeat news last week, as problems continued for the retailer on its home front. For the first time in a decade the retailer posted a drop in sales for the four-week period from 28 October to 24 November in the US. And this despite Wal-Mart’s concerted efforts to woo holiday custom through heavy discounting and widely publicised ‘rollbacks’.

While the 0.1% decline left analysts fretting over levels of consumer spending in the run up to Christmas, the negative sales figures also left a question mark over Wal-Mart’s consumer appeal in the US.

Clearly, Wal-Mart’s ‘pile it high, sell it cheap’ attitude holds the greatest attraction to lower income consumers, the group first to feel the pinch in times of economic difficulty. However, with the growing turn towards more up-market retailers, as is evidenced through the prolific growth of the likes of Whole Foods Markets, and with Wal-Mart’s nearest (and slightly up-scale) competitor Target reporting comparatively strong sales of late, Wal-Mart has been forced to modify its US offering.

This attempt has met with limited success. For example, Wal-Mart’s highly publicised foray into organics has not been universally welcomed, as organic groups fear the retailer’s demand for cheep products will result in declining organic standards. Indeed, earlier this month an advocacy group found Wal-Mart was failing to distinguish between ‘natural’ and ‘organic’ in its in-store labelling.

And while Wal-Mart beat Tesco to the punch in India, the anticipation surrounding the UK retailer’s entry into Wal-Mart’s home territory has continued to grow. Although it is clear that Tesco is not planning a head on collision with the might of Wal-Mart, the fact that it is offering a unique model specifically designed to fit into an as yet unidentified niche in the US is indicative of Wal-Mart’s failure to capitalise on new sectors, such as the convenience and high-end markets that Tesco is expected to be gunning for.

Rumours circulated last week that Tesco has now secured its first Las Vegas store. Meanwhile, it has also been suggested that the UK’s largest retailer intends to import two of its trusted UK suppliers Stateside. Tesco has remained characteristically tight-lipped on the subject, stating that it wants US consumers to be the first to see what it has to offer. Perhaps this is a canny approach to PR, as the rumours and speculation surrounding Tesco’s US move multiply and the secrecy in which the project is cloaked leaves us hungering for more information.

In contrast to Wal-Mart’s news last week, Tesco posted a 9.6% rise in third quarter sales and, despite a gloomy retail outlook for the Christmas season, the company said its sales were looking positive for the Christmas trading season.

Strategy and finance director Andrew Higginson said Tesco was “looking good” moving into the final four weeks of Christmas trading. “There’s all to play for, but so far so good, we are looking forward to having a good Christmas,” he commented.

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